Which two depreciation categories may each be classified as curable or incurable by comparing the cost to remedy a deficiency with the value gained?
Correct Answer
A) Both physical and functional
Physical deterioration and functional obsolescence can each be economically curable or incurable depending on supported full costs and benefits. External causes are generally beyond an individual owner’s control. The question does not imply that all outside influences persist forever.
Why This Is the Correct Answer
Option A is correct because both physical deterioration and functional obsolescence are classified as curable or incurable by comparing the cost to cure with the anticipated increase in value. As with physical deterioration, functional obsolescence is curable when the cost to cure is less than or equal to the value gained.
Why the Other Options Are Wrong
Option B: Physical deterioration, but not functional obsolescence
Option B is wrong because it includes physical deterioration but excludes functional obsolescence. Functional obsolescence is also classified as curable or incurable using the same cost and value comparison.
Option C: Functional obsolescence, but not physical deterioration
Option C is wrong because it includes functional obsolescence but excludes physical deterioration. Physical deterioration is also classified as curable or incurable by comparing cost to cure with value gained.
Option D: External obsolescence only
Option D is wrong because it names external obsolescence only. External causes lie outside the property and are generally beyond an individual owner's control, so they are not classified this way, and the two categories that are classified this way are omitted.
Inside items can be cured
Physical and functional problems are inside the property, so an owner may cure them if worthwhile. External problems are outside the owner's control.
How to use: Use this to recall which depreciation categories are split into curable and incurable.
Exam Tip
Remember that both physical and functional categories carry curable and incurable subtypes; external obsolescence is the one generally outside the owner's control.
Common Mistakes to Avoid
- -Believing only physical deterioration can be curable
- -Believing only functional obsolescence can be curable
- -Treating external obsolescence as curable by the owner
Concept Deep Dive
Analysis
This question tests which depreciation categories use the curable-incurable classification based on cost to cure versus value gained. Physical deterioration and functional obsolescence both arise within the property and can be classified this way. External obsolescence comes from outside influences generally beyond the owner's control.
Background Knowledge
Accrued depreciation has three categories: physical deterioration, functional obsolescence and external obsolescence. The first two can each be curable or incurable depending on whether the cost to cure is less than or equal to the value gained. External obsolescence arises from outside the property and is generally treated as incurable by the owner.
Real-World Application
An appraiser lists a leaking roof as curable physical deterioration and an outdated single bathroom as curable functional obsolescence because both repairs add at least their cost. A loss from a nearby highway expansion is listed separately as external obsolescence.
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